Buying a house think again!

[NSXFRIEND]

http://patrick.net/housing/crash.html

Income has to equal housing price, the prices will continue to decline housing prices are still IMO 30% over inflated(coastal areas) 1 to 2 more years before prices equalize.

Proverbs 22:7
The (A)rich rules over the poor,
And the borrower becomes the lender's slave.
Proverbs 18:23
The (A)poor man utters supplications,
But the (B)rich man (C)answers roughly. :biggrin:

 

[pvmike]

Point #5 in that link is completely and utterly wrong:

Interest rates increases. When rates go from 5% to 7%, that's a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate. The housing bust still has a very long way to go.

For example, if interest rates are 5%, then $1000 per month ($12,000 per year) pays for an interest-only loan of $240,000. If interest rates rise to 7%, then that same $1000 per month pays for an interest-only loan of only $171,428.

Recent lower Fed inter-bank lending rates do not directly affect mortgages rates, nor do extra Fannie or FHA guarantees. The 30-year fixed mortgage rate actually went up after the Fed's rate cut, because rate cuts cause higher inflation.

The author's background? Here:

About Patrick
Patrick Killelea has no background in real estate at all. You should not believe anything he says until you understand the math yourself. Here's the math:

3% cost of renting < 9% cost of owning

If you understand that, then you probably understand the rest of this site as well. If your job depends on not understanding that, then you won't understand it.

Patrick is a mediocre perl hacker, and is the author of the O'Reilly book Web Performance Tuning . He likes to graph things with gnuplot, like performance measurements and financial data.

He is always happy to get suggestions on how to improve this site. He's often available to help with website performance problems in the SF Bay Area. Patrick can be reached at [email protected]

Just another hack. Stop following the herd.

 

[Ski_Banker]

He's right on all points. The only problem I see is that he is still thinking (what an idiot -- thinking :tongue that our housing market is driven by basic free market principles. That all ended in recent months. Governmental intervention can/will help stem the decline in housing prices, which is good as long as you don't mind knowing that a gov't crutch is supporting the "stable" value of your home.

Also, he underemphasizes the impact of interest rates. Interest rates *are* going down in the U.S. for most bonds and mortgages. Great, right? Not if you ever want your home to appreciate again. What do you think will happen once the world is no longer at zero interest rates and mortgages are back to (newly-defined increased risk adjusted) levels around 10%?

Face it, we (and every other developed economy) are going to borrow & spend our way out of an economic crisis brought on by nothing more than excess borrowing & spending. Brilliant huh?

 

[pvmike]

Ski, read what's in bold again. That's wrong. In fact, there are more incorrect assumptions:

7. Shortage of first time buyers. - I see stats that demonstrate otherwise.

9. Fraud. - The ability to obtain a "liar's loan" ended 2 years ago. We're just feeling the after effects. Subprime was about 1 trillion, and we're still going to see 1 trillion worth of Alt-A and 500 billion worth of option arm resets within the next few years.

11. Huge glut of empty houses. - We all know what's going on in Detroit, Miami, etc. But what about Southern California? 2/3 of homes listed are short sales and are more akin to offers to sell since a closing isn't guaranteed. If you look at stats for "real" listings, i.e. REO homes and private sellers, there are many more buyers per listing today than 1 year ago.

And what will happen when rates go back up? Those that were smart enough to lock in a low fixed rate will still benefit from it.

The commercial, office and multifamily markets haven't corrected to the same degree as the residential market. The residential market will recover first, as govt intervention will ensure the ability to finance residential housing. Not a permanent solution by any means (I know the CMBS market is down 95% for the year, from 200+ billion to 12 billion), but it will ensure that the residential market will have financing in the near term.



Ski, you recently took a trip out here to LA, right? Did you know that new construction permits are at a low (makes sense, of course), foreclosures are declining, and that home prices in outlying areas are below replacement cost? Factor in a constant population growth of 1% (400,000 people in the SoCal area this year), and you'll find that demand will catch supply before housing falls far below the long term historic average (which we're approaching at today's values).

Other local markets will obviously differ, so I'll quality my statements by limiting them to Southern California. OP's prediction is about "coastal areas." Now I'm not predicting that we're at a bottom, but I believe another 30% drop is incorrect. That's equivalent to how much LA/OC has dropped from it's peak thus far.

Face it, we (and every other developed economy) are going to borrow & spend our way out of an economic crisis brought on by nothing more than excess borrowing & spending. Brilliant huh?

Is there any other way? :tongue:

 

[sahtt]

The rules to this game are ever changing. Applying scenarios using the old rules is gambling, not investing.

True, real wages have not increased in some time against rising home prices which is unsustainable. Except when it isn't. Don't buy the house for an investment, buy it as a luxury over an apartment etc. that is worth the associated cost and you'll be fine.

 

[eddiensx]

That line of economic reasoning doesn't appear to apply now. We are preparing to go into a period of time when the "haves" will increase what they have, and the "have nots" continues to grow.

As the rate of inflation increases, the cost to replace the house will go up by that amount, at the minimum.

The areas with the least apprecation will be where the majority of people will purchase.

Also remember, people don't buy houses, they buy house payments. The fed knows this, so if they can reduce the cost of lending, they will be able to reinflate the real estate bubble.

Assuming the average house lost 25% of it's value froom it's all time high, real estate values should return to the higher values in 5-6 years assuming a growth factor of 4-5% per annum. I would recommend that a person purchase a house they like now, lock down a long term fixed rate mortgage and know that in 10 -15 years, your investment should have doubled.:biggrin:

 

[Daedalus]

I agree with the 30% drop in real value from current prices, and there is some flexibility in how we get there. Maybe prices flatten for 20+ years until inflation catches up, or maybe they retreat a lot over the next few years. I predict the market will bottom in 2012, but a lot can happen between now and then. The government can alter the course, but they don't have much impact on the destination. This book is an excellent read on the bubble, with copious amounts of data to illustrate when and why things happened, and what we can expect to happen (and not happen) in the future.

 

[BioBanker]

Who knows where all of this is headed. Between the new administration who is going to inflate, commodity prices at many year lows, and a cleansing of the housing market already well underway, it could easily go up, or down, from here.

All you can say forsure is that we need to worry about inflation now and that what happens next is unlikely to be like the early 80's, where the money supply didnt change. The whole point of today's exercise is to increase M1 - look at what happened last week to M1! That money has to end up in someones hands.

 

[jond]

My guess is houses have another 50%+ to drop.
Houses do not increase in value. They only keep up with inflation.
The average house today should cost around $120,000, not $200,000.
Also, they should over correct when they come down, so really the AVERAGE house should cost around $80-90,000. And really since we went so high, maybe we'll correct all the way down to $70,000. Of course this will cause a great depression, so I'm sure the worlds governments will do everything they can to keep the ride going. (can the do negative interest rates, lol)

 

[01blacks4]

80K for an average house?

LOL comments like this are just moronic:frown:

 

[jond]

80K for an average house?

LOL comments like this are just moronic:frown:

Sorry, I missed which part of my argument you disagree with.

 

[Prospeed]

80K for an average house?

LOL comments like this are just moronic:frown:

I think he means in VA not in CA!! hehe I wish we can go back 30+ years and get houses for around 80k but that wont happen over here that's for sure.Hmmm maybe in death valley. :smile:

 

[steveny]

80K for an average house?

LOL comments like this are just moronic:frown:

There is a bear trap and a bull trap in every correction so although it's highly unlikely I wouldn't totally disregard it.

 

[jond]

I think he means in VA not in CA!! hehe I wish we can go back 30+ years and get houses for around 80k but that wont happen over here that's for sure.Hmmm maybe in death valley. :smile:

The national average. CA is higher than the national average, not sure by how much. Basically reverting to where prices were 10 years ago.

There is a bear trap and a bull trap in every correction so although it's highly unlikely I wouldn't totally disregard it.

The thing you have to ask is what is different today vs the prior 100+ years that would keep houses up in value? Back in the 1890s they spiked and came right back down, in the 1980s they spiked and came back down. I don't see anything different other than scale.

Now our government is debasing our dollar(it seems), so that $200,000 5 years ago is only worth maybe $170,000 in todays dollars. So maybe they'll attack it that way. Cut the value of the dollar in half.

 

[steveny]

The national average. CA is higher than the national average, not sure by how much. Basically reverting to where prices were 10 years ago.




The thing you have to ask is what is different today vs the prior 100+ years that would keep houses up in value? Back in the 1890s they spiked and came right back down, in the 1980s they spiked and came back down. I don't see anything different other than scale.

Now our government is debasing our dollar(it seems), so that $200,000 5 years ago is only worth maybe $170,000 in todays dollars. So maybe they'll attack it that way. Cut the value of the dollar in half.

If they make it harder and harder to get a loan no one will qualify. I think you are aware how much RE I own. I am in the process now of buying myself a new house and the loan part is a major PITA.

 

[Ko-nsx]

If they make it harder and harder to get a loan no one will qualify. I think you are aware how much RE I own. I am in the process now of buying myself a new house and the loan part is a major PITA.[/QUOTE


Im with you there!! Im buying a home in Austin. I have cash on hand, no revolving debt, a good credit score and make a minimum, 90k a year!!!!! FHA's overtime rule beat up 2 lenders and the 3rd one just got the clear to close on Fri. Been trying to get this done since the beginning of NOV.

By me working offshore and half of my pay being in overtime(3 weeks on /3weeks off), FHA rules won't count OT or bonuses, uless they have been consistant for 2 years. I had to get a letter from the payroll and HR dept about how offshore work is paid. They keep asking the same question, "is the a chance the OT will stop?" With oil prices going down, that made the underwriters drill me even more. Im closing dec 31(so they say), but it has been a major PITA!!!!! This is my 8th home and second as a PR, and i never had a problem in the past.

 

[steveny]

If they make it harder and harder to get a loan no one will qualify. I think you are aware how much RE I own. I am in the process now of buying myself a new house and the loan part is a major PITA.[/QUOTE


Im with you there!! Im buying a home in Austin. I have cash on hand, no revolving debt, a good credit score and make a minimum, 90k a year!!!!! FHA's overtime rule beat up 2 lenders and the 3rd one just got the clear to close on Fri. Been trying to get this done since the beginning of NOV.

By me working offshore and half of my pay being in overtime(3 weeks on /3weeks off), FHA rules won't count OT or bonuses, uless they have been consistant for 2 years. I had to get a letter from the payroll and HR dept about how offshore work is paid. They keep asking the same question, "is the a chance the OT will stop?" With oil prices going down, that made the underwriters drill me even more. Im closing dec 31(so they say), but it has been a major PITA!!!!! This is my 8th home and second as a PR, and i never had a problem in the past.

ten foot off the ground flaming cheerio hoops to jump through.